The importance of M&A for a CFO’s growth strategy

Mergers and acquisitions (M&A) continue to play an integral role in supporting an organisation’s long-term investments, putting the CFO in pole position to influence the future direction of an organisation.

Hywin Wealth’s CFO, Lawrence Lok, did just that when he successfully propelled the business into China’s health sector following the acquisition of Beijing  iLife3 Technology (Life Infinity), a health management service provider. As part of the deal, Hywin raised a total of more than $20.7 million. It has entered into share transfer agreements and a capital increase agreement with Life Infinity.

Lok’s expertise in M&A, good timing, and a keen interest in technology proved to be the winning formula, after the Covid-19 pandemic highlighted a glaring gap in the market for Hywin, given their client base consisted of high-net worth individuals.

“With rising affluence and an ageing society, health management has become a priority for the families of Hywin clients in China, and a pressing topic for their wealth management advisors,” Lok said in 2022, following the acquisition.

“The health management business will expand Hywin’s sources of revenues and further strengthen our client relationships. The complementarity of wealth and health will ensure our shareholders capture value from the two most important and systemic needs of China’s affluent population.”

Lok is just one of many CFOs who have made M&A a cornerstone of their growth success. Mickey Kalifa, CFO of global marketing and technology company DEPT, and Ebury CFO Jose Esteban have both leaned on M&A opportunities to help propel their businesses in the wake of pandemic.

The CFO’s crucial role in M&A

According to a recent PwC report, “now is not the time to fall out of love with M&A”. While overall deal volumes in 2022 were 9% above pre-pandemic levels, they remained below the record-breaking 65,000 in 2021 .

In a recent interview with The CFO, Esteban notes senior finance leaders play a crucial role in both the evaluation of M&A targets and the implementation of transactions.

He says it is up to the CFO to ensure that a target company’s valuation is accurate, not only because it will impact its price but help define the intangibles and potential contingent liabilities that will be included in its balance sheet.

“CFOs must also understand a transaction’s impact on the business and its potential to generate synergies that could leverage additional revenues. This is because the acquisition target may cannibalise current business revenues, and, therefore, the CFO must consider how any cost efficiencies can maximise the contribution of a particular business line,” he adds.

Esteban explains that the CFO must also consider the regulatory impact of a merger or acquisition, including the need for regulatory approval. And also to consider whether the acquisition will generate any change in current regulatory reporting.

“The CFO is one of the senior managers responsible for ensuring that the M&A transaction follows the company’s governance, which includes getting approvals from company committees, shareholders, and also banks and lenders,” says Esteban.

M&A a winning strategy for business expansion

The rapidly changing business environment has made M&A activity more important than ever, as organisations seek to remain competitive and adapt to new market conditions including global recession fears, rising interest rates and general economic uncertainty.

More importantly, M&A can give organisations various advantages, including increased market share through acquiring rival companies, and diversifying product and service offerings. Another benefit is improved operational efficiency through streamlining operations and eliminating redundancies.

The combination of resources and expertise resulting from M&A can also create synergies that generate cost savings and ultimately contribute to enhanced financial performance and increased competitive edge in the market.

For Hywin Wealth Management, the move provided the company access to a range of new technology and intellectual property. Lok tells The CFO that the new product also strengthens their relationship with clients following a demand for this type of service from their client base.

Walking the integration tightrope

The success of an M&A deal rests on several metrics, including ensuring compatibility; DEPT’s Kalifa notes a good balance and chemistry between the cultures of the companies can lead to a positive and productive work environment.

Effective communication throughout the process is also crucial, he says. “It boils down to liking each other, the chemistry between us. Ultimately successful partnerships come down to a meeting of the minds. Also, there’s communication about becoming a part of DEPT from the start.”

For Lok, getting shareholders around the table and leveraging relationships was the easy part, but integration proved to be challenging.

“All of these clinics run differently and have been run differently for years,” he says. As a result, practical questions around payments quickly arose. “You can’t [impose] on them management from the top because these are things that could destroy a lot of value,” says Lok.

The internal debate raged on as decisions around branding also had to be made, but more critical for Lok and the finance function was streamlining financial reporting.

“Everyone was on a different system. There was no centralised CRM,” he said.  “It was a huge project, and we spent weeks with each of our acquired companies trying to figure out how their processes will gradually become ours,” says Lok.

He adds that the integration process was tricky and required a degree of microscopic level understanding of why and how things are done in the newly acquired business.

“You still rely on the acquired team to run the business, run the operations in the early days. And then, over time, it becomes one,” he explains. “You can’t just introduce a new team and a new way of doing things; it does not work like that.”

M&A has the potential to be a highly beneficial tactic for companies seeking to expand and secure long-term success by establishing new revenue streams.

It is undeniable that CFOs play a crucial role in the process, from identifying potential targets to overseeing the integration of acquired businesses. However, CFOs should be aware of the impact cultural differences and regulatory challenges could have on the success of an acquisition.

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